With global equities returning an annualized return, adjusted for inflation, of 5% according to financial historians, it is no surprise that equity bulls are betting on a narrative of incompatible outcomes. But that, ultimately, could be bad news for risk assets. To understand why, it is important to compare stocks and bonds and understand which is better for risk assets.
The Federal Reserve’s favorite inflation gauge came in hot for January, which could be a sign of higher inflation in the months to come. In practice, however, it leaves much to be desired. That’s because it’s impossible for an individual investor to gain exposure to the asset, making it difficult to hedge against inflation.
How attractive fixed-income investments are right now is a testament to these times of high inflation and high share prices. Wall Street’s “Dr. Doom”, economist Nouriel Roubini, has urged investors to stay away from traditional assets like stocks and bonds, and look to alternatives to hedge against potential inflation.
For the first time in 16 years, yields on short-term Treasury bills have climbed to around 5%. That poses stiff competition to equities, which have seen a steady rise in recent years. Even so, bonds are still seen as a safe haven in times of market turbulence, which could be beneficial for risk assets.
Equities may have gained on the week, but investors may need to reassess the interest rate outlook after an unexpected labour market acceleration. This could mean that bonds will become even more attractive to investors, as the yield on the 10-year Treasury note could continue to rise.
Ultimately, stocks and bonds offer different benefits to investors. Bonds offer a safe haven for investors looking for stability, which could be beneficial for risk assets in times of market turbulence. However, stocks can offer higher returns, which could be beneficial for long-term investors.
Investors should consider the trade-off between the two assets when deciding which one is better for risk assets. Bonds may offer a safe haven, but stocks can offer higher returns. It is important to understand the inherent risk associated with each asset and to make an informed decision based on the current market conditions.